California’s “Billionaire Tax” is encompassed in Proposition 40 on the November ballot. Proposition 40 amends the California constitution and various provisions in the California Revenue and Taxation Code. It has been advertised as a ”one time” tax on wealth in excess of $1 billion owned by California residents or California domiciliaries. For many voters, that can seem appealing. After all, who can object to a “one time” tax on the ultra-wealthy that is going to be used to fund health care and education?
Unfortunately, the truth about this tax is disturbing. It is the ultimate “bait and switch.” Without any further public vote, Proposition 40 allows the California legislature to convert the “one time” tax to a more frequent tax. Without taxpayer approval, the legislature can also drop the $1 billion threshold to a far lower number.
As far as the “one time” part of it, economics professor Emmanuel Saez, one of the drafters of Proposition 40, was quoted as saying: “It is true, I’m not going to pretend that it’s one, once, and never again—no wealth tax will ever happen after that one. You can’t commit to that.” Bait and switch!
As a practical matter, the California Franchise Tax Board will have to staff up to enforce the tax. The Franchise Tax Board has limited expertise in matters involving valuation, and FTB personnel must be trained to enforce the provisions of many convoluted, illogical, and ambiguous provisions in Proposition 40. From a practical standpoint, once this new bureaucracy is trained and put in place, it is hard to imagine that it will simply go away because of the supposed “one time” tax.
The Billionaire Tax has provisions that make absolutely no sense. For example, any real estate that is directly owned (meaning individually or through a revocable trust) is excluded from the computation of a taxpayer’s wealth. Let’s consider the simple example of a husband and wife. If they individually own $2,000,000,000 of investment real estate, they pay no wealth tax. But if they own the same $2,000,000,000 of real estate in limited liability companies that they equally own, their wealth for purposes of the tax is $2,000,000,000. How does that make any sense?
Of course, due to liability concerns, no knowledgeable lawyer would ever recommend their client own investment real estate in their own name. But for purposes of the Billionaire Tax, even though husband and wife are in the same economic position, in the first situation they owe 0 wealth tax, and in the second approximately $50,000,000 in wealth tax.
In addition to rules that are illogical and are disconnected from the stated purpose of the tax, there are also many anti-taxpayer presumptions incorporated in the Billionaire Tax. Even though proposition 40 is not yet law, if it becomes law, the determination of whether a billionaire is subject to tax as a California resident or domiciliary is made as of January 1, 2026. The actual net worth calculation is made as of December 31, 2026.
Let’s consider the example of a lifelong Singapore resident who has accumulated 2 billion dollars of wealth. Eager for the freedom and opportunity of America, they move to California on December 31st, 2025 to celebrate the new year in their new home.
If Proposition 40 passes, one day after they move, they become subject to the Billionaire’s Tax. Proposition 40 provides that one hundred percent of the tax is California’s to take, regardless of residency history. If this does not “fairly represent the extent to which the taxpayer’s excessive wealth was accumulated in, or substantially sustained by, California, the taxpayer may petition for….use of an alternative apportionment method for all or any part of the taxpayer’s wealth.”
On the above facts, it should be obvious that our new California residents’ wealth was not accumulated in California. Yet they must petition (i.e. beg) for relief, by proving by “clear and convincing evidence” that the “excessive wealth did not substantially accumulate in California,” AND that the excessive wealth was not substantially sustained in California” for a specified 4-year period before December 31, 2026.
Now let’s assume that our new California resident made their fortune by investing in the stock of a California technology company and hit the jackpot before they moved to California. Under the above rules, they could still be subject to the Billionaire Tax even though their sale of the stock prior to moving to California would not have been subject to California (or federal) income tax. Even worse, their move to California on December 31, 2025 made them subject to a tax that wasn’t even law until well AFTER their move.
Additional articles on more of the “special rules” and the constitutional and practical problems posed by Proposition 40 will be published soon.
